The Biden administration recently reached a deal with the European Union (EU) to eliminate the EU’s retaliatory tariffs on U.S. exports. However, the agreement failed to eliminate barriers on the U.S. side, and instead replaced them with tariff-rate quotas on imports. No wonder it was endorsed by the United Steelworkers Union and the American Iron and Steel Institute, whose president argued that the deal would “prevent another steel import surge.” Although the removal of the retaliatory tariffs by the EU helps American exporters, the new tariff-rate quota system implemented by the U.S. still has severe negative effects on the economy and the dollar.
U.S. Tariffs on Steel & Aluminum: A Case Study in Bad Policy
Under authority provided in Section 232 of the Trade Expansion Act of 1961, the U.S. imposed a 10 percent tariff on aluminum and a 25 percent tariff on steel from the EU beginning in 2018. The new trade deal between the U.S. and the EU ended these tariffs, but replaced them with a different import restriction in the form of tariff-rate quotas.
Tariffs, or any import restriction, are a surefire way to raise the price of any commodity. In fact, tariffs throughout history have been knowingly used to raise prices at the expense of buyers in order to benefit or harm certain groups. The Trump administration was fond of using this unwieldy weapon in trade policy. Tariffs ultimately disincentivize producers from importing goods from other countries, forcing American companies and consumers to source their goods from elsewhere or incur higher costs. Companies are rapidly trying to move production away from tariff-targeted countries, causing greater confusion in the supply chain. Organizations such as the American Apparel & Footwear Association (AAFA) have recently petitioned the U.S. Trade Representative Katherine Tai for “across the board” tariff relief. In a letter to Amb. Tai the AAFA stated:
This holiday season --- what should be a time of great celebration --- will be marred by empty store shelves, inflation, and lost U.S. jobs. And the interconnected value chains in our economy mean that this pain will be widely felt as companies and communities who thought they were insulated become increasingly exposed to these damages.
Unfortunately, the Biden administration is hesitant to fully reverse steel import restrictions and, in fact, is implementing a tariff-rate quota system for imports to replace the flat tariff. Quotas work differently than tariffs, but have similar consequences. Instead of a consistent tax on any amount of a good, tariff-rate quotas cap the amount of imports, and then apply a tariff to any further imports. This is actually often worse than tariffs. Bryan Riley, Director of NTUF’s Free Trade Initiative, notes:
As bad as tariffs are, at least they generate revenue for the federal government … Additionally, quotas are typically more complex and bureaucratic than tariffs. For example, there is not just one U.S. steel quota; there are 54 separate quotas for different types of steel for each of our trading partners … Foreign exporters who are allocated a portion of a quota benefit from higher prices and less competition.
The administration, instead of implementing sound and rational trade policy, has replaced bad trade policy with arguably even worse trade policy. Steel demand is currently at an all time high. Companies are shifting their supply chains rapidly and need the raw material to build new infrastructure to support them, evidenced by steel wire’s 165 percent jump in demand from this point last year. Producers like Campbell Soup Company have stated that they are paying more in input prices for steel packaging. This higher input cost will be passed onto consumers, who will have to pay more for steel packaged goods. Creating quotas in the current steel market would spell disastrous effects on the economy and all who depend on steel. Although the direct effects of tariffs and quotas are bad enough as is, the higher prices resulting from tariffs contribute to a problem that is much more painful to solve: inflation.
Conclusion
For a variety of reasons, consumer prices have been rising and many economists warn that the U.S. could be headed into an inflationary period. Increased transfer payments, weak supply chains, and massive government spending in the wake of the COVID-19 pandemic are all to blame. The inflation rate is currently 5.4 percent, the highest it has been in a decade. Prices are rising quickly and consumers and producers alike are getting hit hard. The last thing the economy needs is more inflationary pressure.
The U.S. dollar’s inflation rate is climbing steadily. Consumers and producers are losing purchasing power and watching their savings become less and less valuable. Whether the inflationary pressures will persist is a matter of debate, but there is no doubt that tariffs only aggravate this trend by applying upward pressure on prices. This is the last thing that the U.S. economy needs right now. Inflation has no easy fix, but most can agree that the government should take steps to mitigate upward pressure. The administration has an opportunity to alter the dangerous path that U.S. trade policy is following. It remains to be seen whether they will act.